May 30th 2009

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Articles from this issue:

CLIMATE CHANGE: Solar inactivity points to further global cooling

EDITORIAL: Australia's biggest financial scam?

CANBERRA OBSERVED: Next generation to pay for Swan Budget

NATIONAL AFFAIRS: Fund infrastructure with a development bank

DEFENCE WHITE PAPER: Glaring flaw at heart of government defence thinking

ASIA: Will China "liberate" the South China Sea?

FOREIGN AFFAIRS: US auto industry meltdown highlights financial collapse

UNITED KINGDOM: Unrestrained greed caused banking crisis

HUMAN RIGHTS: A bill of rights will diminish our freedoms

ILLICIT DRUGS: Cannabis use linked to suicide, schizophrenia

EDUCATION: The Frankfurt School and the war on the West

OPINION: The forgotten factor: land prices

Bill of rights vs. common law (letter)

Beware of 'Plimer contrarianism' (letter)

CINEMA: Cold War metaphor encoded in vampire movie

BOOKS: THE HORNET'S STING: The Amazing Untold Story of WWII Spy Thomas Sneum, by Mark Ryan

BOOKS: HEROES: From Alexander the Great to Mae West, by Paul Johnson

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US auto industry meltdown highlights financial collapse

by Peter Westmore

News Weekly, May 30, 2009
The crisis in the US car industry has been many years in the making, writes Peter Westmore.

The bankruptcy of Chrysler and the looming collapse of General Motors, two of the "Big Three" motor vehicle manufacturers in the United States, show the depth of the financial crisis engulfing the US economy. Hundreds of thousands of jobs have been lost in this industry alone.

The third manufacturer, Ford, is expected to reach the same point in about a year's time.

The effect on American industry and employment over coming years will be horrendous, and its consequences will reach across the globe, as the US motor industry's production is globally sourced, and local subsidiaries will inevitably be affected as the American parent companies go to the wall. In turn, the financial troubles in the United States will cause a crisis of confidence in Australia.

Fate of car industry

One of the best analyses of the fate of the American car industry was provided by R.L. Polk and Co., the leader of global automotive intelligence.

Its recent study, Forecasting Global Vehicle Demand, found that:

• Global light vehicle (car, utilities and SUV) sales will decline approximately 15 percent from 2008 to 2009.

• Emerging markets, led by strong growth in the Asia-Pacific/Middle East region, will emerge from the crisis earlier than saturated markets like North America and Western Europe.

• Volkswagen is expected to surpass General Motors in 2009 as the world's number two automaker (behind Toyota).

Last year, around 11 million motor vehicles were sold in the United States. In 2009, this will fall to about 8.4 million, in part because Chrysler is closing all US manufacturing plants for 60 days while it attempts to negotiate a bankruptcy sale.

The crisis in the US car industry goes back years. In the early 1980s, government loans were needed to save Chrysler from bankruptcy. The company successfully restructured into more profitable manufacturing lines, and survived.

The latest troubles affect all major American manufacturers. General Motors, having posted losses every year since 2005, lost over $40 billion in 2008. It has reported that, in the first quarter of 2009, it lost another $9 billion (and depleted its cash reserves by over $14 billion). Ford has posted losses since 2006, including about $20 billion in 2008. Chrysler lost $11 billion last year.

Last November, executives of Chrysler and General Motors appeared before Congress seeking a government bail-out. Last December, President Bush gave nearly $20 billion in loans to GM and $6 billion to Chrysler.

Last month, the Obama Administration offered further loans, conditional on restructure plans. Chrysler's plan, based on a takeover by the Italian manufacturer Fiat, collapsed, and the company went into administration.

The underlying problem for US car firms is that they are not producing enough smaller vehicles to compete with those manufactured by their Asian and European rivals, and are financially crippled by expensive health and pension plans for current and former employees.

There are also deeper problems. They suffer from chronic overcapacity, producing more cars than can be sold, and have ended up selling cars at a loss. American cars are widely viewed as lagging behind those of Asian and European competitors in quality, styling and reliability.

US car firms have failed to develop new technologies, including light-weight carbon-fibre bodies and petrol-electric hybrids, where they are playing catch-up with Toyota and Honda.

The crisis has already engulfed their subsidiaries in Canada and Mexico, while component manufacturers are already laying off thousands of workers, and are reported to be facing a shortfall of over $30 billion in 2009.

The speed of the financial collapse has taken almost everyone by surprise.

A decade ago, Chrysler, GM and Ford accounted for over 70 per cent of US car sales. But sales are now down to 50 per cent, and will slide further. Under GM's restructure plans, the company intends to employ fewer than 40,000 workers, less than 10 per cent of the number it employed in 1970.

While car sales in India and China are expected to increase in 2009, growth in those countries has also been affected by the financial meltdown.

Despite the troubles in the US auto industry, motor vehicle manufacturing elsewhere is still profitable. The decline of the "Big Three" US manufacturers is leading to the emergence of both European and Asian companies, particularly Toyota (Japan), Honda (Japan), Fiat (Italy), Volkswagen (Germany), and the Hyundai-Kia Automotive Group (South Korea).

South Korea's auto industry has grown very rapidly, has over seven per cent of the US car market, and is now the world's fifth largest under the protection and support of South Korea's government and favourable foreign exchange rates.

The lack of any industry policy in Australia means that the Rudd Government's policies in response to the crisis in the US auto industry will be almost entirely reactive.

- Peter Westmore

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